Payday Loans: Understanding Interest and Fees

payday loans: understanding interest and fees

Payday loans can be a source of additional funding for the consumer in a pinch. While approval is often a quick-and-easy process and the funds can be obtained almost instantly, there are still a few things the borrower should be aware of. Unlike a traditional loan at a bank or credit union, the payday loans come with much higher interest rates and additional fees. It is important that the consumer become familiar with these factors and understand the agreements.

Above-Average Interest Rates

The rates for obtaining a short-term loans, such as payday loans, are much higher than what would be charged by other lending institutions such as banks. Annual percentage rates have been seen as high as 300 percent or more. However, the loan is not meant to have a grace period of one year. As the name indicates, they are typically paid back when a borrower receives his or her next paycheck. The length of the loan is typically weekly, biweekly, or monthly. This offsets the high interest rates to a degree.

Additional Fees

Payday loan lenders may also charge various fees related to providing the loan or collecting payment. While these fees can be at a fixed rate or flat-dollar amount, they may also be based on a specific percentage rate. Lenders typically charge fees for failure to meet repayment terms, such as paying late or for a check that is not honored by a bank. Another common fee that may be charged is a renewal fee, should the consumer request to extend the duration of the loan. Many of these fees can be avoided by repaying funds on time. Depending on the specific lender, some fees may even be waived if the funds are paid back early.

Truth in Lending

There are federal laws governing all financial institutions; these laws require that payday lenders disclose all fees and interest associated with the loan. This information should be given to potential borrowers before they officially accept any type of loan. The Truth in Lending Act stipulates that these numbers must be offered in writing before the consumer agrees to the loan. This information must include both the annual percentage rate (APR) and the finance charge in a dollar amount. These policies protect borrowers from predatory lending practices.

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